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Optimal debt contracts and diversity of opinions: an extreme case of bunching

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Author Info
Renou, Ludovic (European University Institute)
Guillaume Carlier

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Abstract

This paper studies optimal menus of debt contracts such as secured debentures or bonds, in the presence of diversity of opinions between borrowers and lenders. We first characterize incentive compatible contracts, then prove the existence of optimal debt contracts. Finally, we are able to explicitly characterize such optimal menus within a specific case: we notably show that borrowers optimally offer at most two contracts, which is an extreme case of bunching.

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File URL: http://repec.org/res2003/Renou.pdf
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Publisher Info
Paper provided by Royal Economic Society in its series Royal Economic Society Annual Conference 2003 with number 172.

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Date of creation: 04 Jun 2003
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Handle: RePEc:ecj:ac2003:172

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Web page: http://www.res.org.uk/society/annualconf.asp
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Related research
Keywords: debt contracts; heterogeneity of beliefs; multidimensional screening; bunching;

Find related papers by JEL classification:
C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
D8 - Microeconomics - - Information, Knowledge, and Uncertainty
G3 - Financial Economics - - Corporate Finance and Governance

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